Mexico's President Vicente Fox and several Caribbean Prime Ministers spoke firmly of this need as far back as the Quebec Summit of the Americas in April 2001. The Declaration of Margarita from the 3rd Association of Caribbean States Summit in December 2001 endorsed a call from President Jagdeo of Guyana for a Regional Development Fund in the FTAA.

Now, with the FTAA negotiations gathering momentum, Prime Minister Owen Arthur of Barbados has placed the issue squarely on the table. In a recent speech he observed that the members of the European Union (EU) had "showed great ingenuity by creating social cohesion funds and regional development funds to ensure the efficacious inclusion of its least developed members such as Spain, Portugal and Ireland". He went on to point out that no similar initiatives are being contemplated in the FTAA, in spite of the much wider disparities in income levels within the Americas.

Economists have been studying the crucial role of financial transfers in bringing about income convergence within integration groupings. Income convergence is a process by which the poorer countries close, or narrow, the gap between their average per capita income and that of the richer members of the grouping.

The Annual Meeting of the Inter-American Bank (IDB) held recently in Milan heard a presentation on "Asymmetries and Cooperation in the FTAA". The paper was prepared by by Jose Antonio Ocampo, Executive Secretary of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) and Ines Bustillo, head of the ECLAC's Washington office.

The paper examines the experience of Puerto Rico in its free trade relationship with the United States. It points to the significant role of fiscal transfers from the Federal Government, and of emigration to the US, in accelerating growth and mitigating unemployment under conditions of free trade.

Federal transfers have represented nearly 10 percent of Puerto Rico's Gross Domestic Product (GDP) since the 1970s, adding between one-half and one percent of a percentage point to per capita income growth in the 1970s and 1980s. Emigration may have added another quarter of a percentage point to per capita income growth.

The authors argue that the lesson for the FTAA is that income convergence among the different partners requires not only (i) special and differential treatment (S&DT) for the smaller and poorer countries, but also (ii) financing provisions and (iii) a degree of labour mobility; similar to that enjoyed by Puerto Rico with the US and by the EU's poorer members.

Another paper presented at the meeting by Raul Ojeda examined the EU experience in the provision of Structural Funds and Social Cohesion Funds to its poorer members. These funds are estimated to have contributed 2 percent per year to Spain's GDP growth since joining the EU, playing a large part in that country's remarkable economic transformation.

Applying the EU formula to the FTAA, the author shows that that Mexico would receive close to $100 billion per year in direct public investment transfers; Central America $36 billion per year; and the rest of the FTAA $351 billion per year. With this level of funding income convergence similar to the EU would be achieved within a decade.

The clear implication is that in the absence of similar funding provisions the income disparities in the FTAA will persist and may even widen. The FTAA design needs to incorporate this element if it is to be socially beneficial, and hence, politically sustainable.

 

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